Early unwinding of options-futures arbitrage with bid/ask quotations and transaction prices

Joseph K W FUNG; Henry M.K. Mok

doi:10.1016/S1044-0283(03)00008-5

Early unwinding of options-futures arbitrage with bid/ask quotations and transaction prices

Joseph K W FUNG, Henry M.K. Mok^*

^*Corresponding author for this work

Research output: Contribution to journal › Journal article › peer-review

3 Citations (Scopus)

Abstract

By early unwinding of initial arbitrage positions simulated from bid/ask quotes and transaction prices, options-futures arbitrageurs can capture extra profits. Profits peak when arbitrageurs apply the dynamic early-unwinding strategy to the bid/ask quotes. Profits are at their lowest when arbitrageurs use the static hold-to-expiration strategy based on transaction prices. However, due to stale quotes, executing trades at prevailing bid/ask quotes can overstate both the size and frequency of arbitrage profits compared to transaction data for either the early-unwinding or the hold-to-expiration strategy.

Original language	English
Pages (from-to)	121-133
Number of pages	13
Journal	Global Finance Journal
Volume	14
Issue number	2
DOIs	https://doi.org/10.1016/S1044-0283(03)00008-5
Publication status	Published - Jul 2003

Scopus Subject Areas

Finance
Economics and Econometrics

User-Defined Keywords

Bid/ask quotes
Early unwinding
Hold-to-expiration
Options-futures parity
Transaction data

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10.1016/S1044-0283(03)00008-5

Cite this

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title = "Early unwinding of options-futures arbitrage with bid/ask quotations and transaction prices",

abstract = "By early unwinding of initial arbitrage positions simulated from bid/ask quotes and transaction prices, options-futures arbitrageurs can capture extra profits. Profits peak when arbitrageurs apply the dynamic early-unwinding strategy to the bid/ask quotes. Profits are at their lowest when arbitrageurs use the static hold-to-expiration strategy based on transaction prices. However, due to stale quotes, executing trades at prevailing bid/ask quotes can overstate both the size and frequency of arbitrage profits compared to transaction data for either the early-unwinding or the hold-to-expiration strategy.",

keywords = "Bid/ask quotes, Early unwinding, Hold-to-expiration, Options-futures parity, Transaction data",

author = "FUNG, {Joseph K W} and Mok, {Henry M.K.}",

note = "Funding Information: This research has been supported by research grants from the Hong Kong Baptist University and the Research Center of Industry and Trade of the Chinese University of Hong Kong. The authors wish to acknowledge valuable comments from an anonymous reviewer, the Hong Kong Futures Exchange for providing the data, and Castor Pang for his excellent research assistance.",

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AU - Mok, Henry M.K.

N1 - Funding Information: This research has been supported by research grants from the Hong Kong Baptist University and the Research Center of Industry and Trade of the Chinese University of Hong Kong. The authors wish to acknowledge valuable comments from an anonymous reviewer, the Hong Kong Futures Exchange for providing the data, and Castor Pang for his excellent research assistance.

PY - 2003/7

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N2 - By early unwinding of initial arbitrage positions simulated from bid/ask quotes and transaction prices, options-futures arbitrageurs can capture extra profits. Profits peak when arbitrageurs apply the dynamic early-unwinding strategy to the bid/ask quotes. Profits are at their lowest when arbitrageurs use the static hold-to-expiration strategy based on transaction prices. However, due to stale quotes, executing trades at prevailing bid/ask quotes can overstate both the size and frequency of arbitrage profits compared to transaction data for either the early-unwinding or the hold-to-expiration strategy.

AB - By early unwinding of initial arbitrage positions simulated from bid/ask quotes and transaction prices, options-futures arbitrageurs can capture extra profits. Profits peak when arbitrageurs apply the dynamic early-unwinding strategy to the bid/ask quotes. Profits are at their lowest when arbitrageurs use the static hold-to-expiration strategy based on transaction prices. However, due to stale quotes, executing trades at prevailing bid/ask quotes can overstate both the size and frequency of arbitrage profits compared to transaction data for either the early-unwinding or the hold-to-expiration strategy.

KW - Bid/ask quotes

KW - Early unwinding

KW - Hold-to-expiration

KW - Options-futures parity

KW - Transaction data

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U2 - 10.1016/S1044-0283(03)00008-5

DO - 10.1016/S1044-0283(03)00008-5

M3 - Journal article

AN - SCOPUS:0038329320

SN - 1044-0283

VL - 14

SP - 121

EP - 133

JO - Global Finance Journal

JF - Global Finance Journal

IS - 2

ER -

Early unwinding of options-futures arbitrage with bid/ask quotations and transaction prices

Abstract

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